There are significant downsides to the FDIC’s current regulatory approach to digital assets, which has contributed to the public perception that the agency is “closed for business” if banks are interested in anything related to blockchain or distributed ledger technology, FDIC Vice Chairman Travis Hill said today. In a speech on tokenization and the future of the U.S. financial system, Hill criticized what he characterized as the agency’s “secretive” approach to crafting digital asset policy, and its unresponsiveness to banks seeking guidance on what activities would be permissible.
“Furthermore, it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting or other purpose, the FDIC should, following an opportunity for public comment, explain how and why,” Hill said. “And finally, the agencies need to distinguish between ‘crypto’ and the use by banks of blockchain and distributed ledger technologies.”
Hill also criticized a Securities and Exchange Commission staff report—Staff Accounting Bulletin 121—which states that an institution safeguarding cryptoassets should recognize the assets on its balance sheet as both an asset and a liability. “This treatment sharply departs from how custodians account for all other assets held in custody, which are generally held off-balance sheet and treated as the property of the customer, not the custodian,” he said. “On-balance sheet recognition triggers the full panoply of capital, liquidity and other prudential requirements only for bank custodians, which makes it prohibitively challenging for banks to engage in this activity at any scale.”
Unrelated to digital assets, Hill briefly touched on the trend of Federal Home Loan Banks placing more restrictions on lending to banks in stress. He said that while FHLBs are poorly positioned to serve a lender of last resort, policymakers need “to think holistically” about the implications of cutting off banks from the FHLBs when stress occurs. “The ultimate costs if the institution subsequently fails are likely to be borne by the FDIC rather than the FHLBs, and it is worth remembering that once a bank has reached that stage, its options to meet liquidity needs are likely to be limited, with all the alternatives potentially also costly to the Deposit Insurance Fund,” he said.
